Hologic, Inc. (HOLX) Earnings Call Transcript & Summary

All right. Great. Thank you for joining us, everybody. My name is Casey Woodring from the Life Science Tools and Diagnostics team here at JPMorgan. I'm pleased to introduce Hologic. We have joined here with our CFO, Karleen Oberton; and CEO, Steve MacMillan. They'll give a short presentation followed by a Q&A session afterwards, where you can ask a question by raising your hand or submitting one via the webcast link. So with that, here's Steve.

Thank you, Casey, for having us, and good afternoon, everyone. Purpose-driven and results-driven, that pretty much captures what the Hologic team is all about. And as I rewind, 3 years ago, we stood up here, and I was very excited at that point in time because we had just said to our employee base that as we entered 2020, all the hard work we've done over the previous few years was going to become so evident to the outside world. And we said that Hologic was in the right place at the right time to make a profound impact in the world. Now, as we all left here -- and I'm still convinced this is probably the first major super spreader event in the United States that year in January of 2020, but clearly, the year unfolded in very different ways, and in reality, everything that we were going to be showing as to how we'd strengthen the base businesses, didn't become as evident. But the neat part is, as we stand here today, it is becoming more evident, both, all of the efforts that would -- pre-pandemic as well as the fundamental strength we have built during the pandemic. And so, to get to the core investment thesis here, I'll come back largely to these first 2 points through the presentation around purpose-driven and results-driven. But I really focus your attention on the third point here that we have transformed into a much stronger company than we were and we wouldn't have wished COVID on anybody. But we have, because of the way we responded, come out fundamentally even stronger and further ahead in revenue, in reputation, in quality of businesses, in employees. And what that's resulted in is more diverse and recurring revenue with more growth drivers, more longer-term opportunities as we strengthened our pipelines, far more global than we were coming in largely because of how we responded to the world's needs country-by-country for molecular COVID tests around the world. And our entire focus while we were responding to the COVID world was about how we could be using that time and frankly, the additional cash that was generated, to strengthen our base businesses for the longer term, and that is what makes us poised for long-term sustainable growth today. So as we get - this all starts with our unparalleled commitment to women's health, which is built on our purpose of enabling healthier lives everywhere, every day, and as we responded and our teams came to work during the pandemic to be able to respond to the world's needs for testing, is right there in that purpose. Our passion of becoming global champions for women's health -- women's health is never needed more of a voice than it does today when we look at many of the events going on around the world, and our promise, The Science of Sure, which is really about us constantly making sure that every product we bring to market, enhances our reputation and meets our standards. This commitment starts from the top, and I am very, very proud of the Board of Directors that we have. And on this slide -- and I'll say 2 quick things about this. So on this slide, you're looking at over 300 person years of healthcare experience that I am able to draw upon, a very globally minded Board with a lot of different perspectives, primarily from the CEO and CFO suites and something I'm very proud of. And the other thing that I'm very proud of is, you're probably looking at the only Board of Directors that met in-person throughout the pandemic with only 1 exception, which was June of 2020. By September of 2020, we were right back because they wanted to match what our employee base did. And while a lot of companies have been focusing on work from home and all that kind of stuff, we have never had any of that debate because we've been there. And it starts with the fact that our employees were showing up to make the tests and get the tests approved through it, and we have all been operating in-person. I'm very proud this Board came together and frankly, it was a great sounding Board, and I still believe, frankly, you're fundamentally better off having these people together in a room than sitting on some Zoom screen. And our commitment to purpose -- it's interesting I was at a session on AdvaMed meeting probably last year where Jim Collins was speaking of good to great. Jim talks about the flywheel, and I realize we already have our flywheel because, starting with our purpose, passion and promise, this is really simple and this is what we articulate to our employees that everybody sees it, right, the R&D team. Our business starts with innovating and creating the life-changing technologies. As we bring that out, that grows our sales and profits. Importantly, we've used those sales and profits, and it's where I believe so strongly that private sector companies can make a massive difference in the world because we've been investing in championing women's health on a global basis, which in turn is expanding policy and access, which, in turn, is allowing our products to reach more women and have a more positive impact on the world. And then the cycle starts again, and everything we do is really built around this cycle that comes out of our purpose, passion and promise. And it's not always obvious to the outside world that can look at our business and say, gee, you have 3 disparate businesses, but there's a unifying force of women's health. It takes us to a higher level and allows us to play in a scale and make the investments across our businesses and across elevating women's health on policy by having these businesses together and thinking about where the businesses are going for the future. And a lot of that has allowed us to elevate global women's health. And it starts with the Hologic Global Women's Health Index, which we developed in partnership with Gallup, which has now become the most comprehensive quantitative measurement of women's health around the world that we're doing on an annual basis. And if you think about it, one of the things I look at, and we talked about as a leadership team several years ago, Hologic tends to be a little underdeveloped outside the United States. Well, in reality, the reason is because women's health is less developed. And so, the best thing we can do for the women of the world, but also candidly for our business, is to elevate the awareness and the opportunities for women's health around the world, and as we elevate that, we are right there to come along with it. We've also been funding project Health Equality that was Mary J. Blige at the White House just a month or 2 ago, as we continue to also help overcome the disparities in women's health even within the United States and certainly around the world, and our global access initiative, which has been a major driver of growth for us as we've been spending more and more time helping on the African continent. And at the same time that we've been elevating global women's health, we've dramatically elevated the Hologic brand, especially outside the United States, where candidly we weren't as well-known pre-pandemic and are very well known today. And it is by engaging the world leaders at places like the World Economic Forum, which we were invited to join a few years ago because of what we were doing, both for the women's health index, and then turbocharged by the awareness of all the health ministers around the world of what we did to help them out during COVID time. From that as well, last year, when Mary J. Blige who we've been working with for a number of years, was asked to perform at the Super Bowl. We also produced our first ever -- and really plan to be a one-off opportunistic commercial for the Super Bowl, which turned out to be one of the highest-rated Super Bowls and a tremendous ad that really is focused on getting women back to their screening, and elevated also, again, our company brand, and partnering with the Women's Tennis Association on a global basis to really help also continue to champion women's health around the world. And all of these things both enabled and turbocharged by our response during COVID time, building on a foundation that was already getting stronger and stronger. And we believe our culture does create a competitive advantage. For all the companies trying to figure stuff out through the last few years, we're incredibly proud that our own engagement scores have hit record levels during the pandemic. And we believe it's because of how proud our team is about how we have responded during the pandemic, both taking care of our existing employees as well as answering the world's needs. And just recently, we were actually rated both the fourth largest in San Diego and fifth -- or basically fourth Best Employer in San Diego area for large companies and the fifth best in the state of Massachusetts with some pretty big companies and some pretty great competition there, and we've moved up that list. And we think all of these things help us in an era where, let's face it, retention and all kinds of issues around employees are front and center on so many people's minds, and we know we've got just a great engaged group of employees all over the place. Now let's focus on these results for a second. As you can see here, I really encourage you to look primarily at the dark blue bar, which is our base businesses on the bottom. But you can't help but notice the gray, which is the COVID revenue that we generated, and I'm very proud of this on 2 things. One is, we never got ahead of ourselves and always recognize that COVID revenue would peak and come back down, and that would be good for the world, but we would also maximize the opportunity while it was there. We also said, even back in 2020, we thought it would last much longer than anybody thought at the time, and I think that is also coming out to be very true even year as we go into 2022. The other part I have you really look at is that blue bar, and that is underneath it, where our business is going. And you can see, if you go back to kind of the 2019 that was about a $3 billion number, last year, call it, $3.4 billion, and that's with several hundred million dollars of chip headwinds for our breast health business. So the great part is, as we sit here today, we've already guided for those of you who haven't seen, to double-digit growth in all 3 of our core businesses over the course of this year. That's going to take that $3.4 billion number, call it into that $3.7-ish billion range. So clearly much stronger as we're coming out of it. I'm very proud that the other thing we didn't do is get ahead of ourselves on things like hiring. And when a lot of companies started to see things going up, Karleen and our teams really stayed very focused, and we continue to manage everything really to -- as much of that. The blue part of these slides, not the total, recognizing that's what we were going to be as we came out of this. Clearly, delivered some very strong EPS during those couple of years, but I think, again, what you'll see here over time is, as we come out of '23 and '24, we're well above where we would have been, had COVID not occurred from the standard of trajectory that we were on. And very importantly, we've generated about $5 billion in free cash flow over the past 3 years, and that has fundamentally changed our capital structure, our ability to do smart deals. And as you see, what we've done is we've redeployed about $1.4 billion of it to 6 deals that really have added growth drivers to each of our businesses. If you look over on the right there, we added 3 new growth drivers in our diagnostics business, 1 in our breast health business and more recurring revenue, and 2 exciting ones in our surgical business that I'll touch on in a moment. The other important part there is, if you notice, the single biggest acquisition we did during this time was of ourselves, that we've continued to buy back shares and put $1.6 billion of it into our belief in ourselves. And meanwhile, we're still sitting on a very strong cash position and a great position we think to be in, as this year will unfold. We also have the luxury with our core businesses all performing very well to operate from a position of strength which is, we can [ wait ] things out and see when the right opportunities are as opposed to feeling a need to go do any kind of deal. Many of you may have seen, we just pre-announced our results on Sunday, and I think there's been some questions here over the last few years of, okay, what's really going on in your core diagnostics business. And there's been these kind of fits and starts that we think have masked both our diagnostics and our surgical business because, over the last few years, we've been placing a ton of Panthers and we said, watch what's going to happen to diagnostics, but they haven't been able to adopt our base businesses because we keep having additional spikes in COVID. So first, it was Delta, then it was Omicron, and they kept putting them off. But the last few quarters here, you're starting to see both our customers bringing on our core businesses on to all those Panthers as well as surgeries, and particularly our surgical business, starting to settle down in terms of staffing and procedural volumes. And so, to do a quick run-through here of the 3 quick businesses, here, if you look at our global diagnostics business, and I'd point you really to our molecular piece, this is all excluding COVID. I think it's pretty interesting. If you look in 2019, that business -- our molecular diagnostics, about $550-ish million, and last year it was $846 million and now growing at a double-digit pace. So what you have here is significantly larger and growing faster than it was pre-pandemic, which is really driven by the fact that we now have 3,200 Panthers placed and that led to this 24.5% constant currency molecular growth here in the last quarter that we just reported. And this is being driven by very simple things. We've placed a whole bunch more Panthers, and we've been dramatically enhancing the menu over the years. And so, now you have the combination of more Panthers and more menu. And as these are starting to get adopted, it's what gives us great confidence in our underlying diagnostics business and where we are headed there. Our breast health business, obviously as we reported about a year ago, just after this conference, as the chip shortage became bigger and bigger, that we were going to be facing some headwinds. The positive is, as we're into '23, we know we bottomed out in our third and fourth quarter, and we're starting to see that business coming back. It's not completely out of the woods yet as we're starting to get a few more chips, but not completely, but we know that, that recovery is fully intact here as we come through the year. And in fact, we're slightly better here in our first fiscal quarter and feel pretty good coming out of the gate. So obviously, in the second half of this year, we're going against some very soft comparables, but that will be driving tremendous growth for us, and we continue to feel very, very good about this business. The other hidden gem in our organization is really the surgical business, and what's been fascinating about this business is, for years, it was really a 2-product business. Many of you have heard that I always thought this would be a business with the right leadership team, we would start to find some acquisitions and build this out. And we have that team in place now. And over the last couple of years, we've done a couple of very good acquisitions of Acessa and Bolder as well as some organic innovation. We developed a fluid management system. And so, as you look here, just from 2019 to 2022, you see that business was up over 20%. And again, we see this now. The magic is, certainly, MyoSure continues to grow. NovaSure, we've actually stabilized and doing well on that. But then we have these other drivers of growth between Fluent and then Bolder and Acessa that are all accretive to our growth rate and really starting to create some excitement in this business as well. And you see there, just in the first quarter, some very strong 14.7% growth we did in the spirit of full disclosure. I had a few extra selling days in the quarter. But even net of that, it's clearly a double-digit performance in the quarter, and we really like the outlook for this business going forward. Overall, obviously, we talked about the balance sheet, and this has been a long journey. Certainly, Karleen and I have lived this -- most of this journey from being very highly levered at 5.5x back in 2012. I joined in 2013, and it's been steady progress down and tremendous balance sheet management to where we sit today, where we're clearly, by all intents and purposes, underlevered or can be in a situation of being opportunistic. And so, in conclusion, what we really bring you back to is a simple thing. This company was getting stronger through the 2017, '18, '19 period that I believe would have been very clear in 2020. Instead, we responded in a very different way in 2020. But over these next few years, we've been strengthening every business, both organically and inorganically. So as we enter 2023, we have this additional strength, and clearly, the best growth outlook at any point in our company's history. We've never been looking at a situation where all 3 of our businesses globally could be posting the kind of growth that we are. And I am so incredibly proud of our team that showed up, especially in the darkest days. I'll tell you -- wrap with 1 quick story. We got our first EUA, emergency use authorization, in mid-March, of 2020, incredibly quick speed. 3days later, the state of California mandated basically work from home. The very next day, our entire team was in to start production and be working on what the world needed then, which is, our COVID tests. And I'm so proud of what our teams have done, and it has fundamentally made us a stronger company than we could have even imagined at that point in time. So with that, Casey, we'll take questions. Thank you.

Great. Well, that was a great overview, Steve. Once again, if you'd like to ask a question, just please raise your hand. But I guess just looking at the pre-announcement here, maybe starting with the outsized growth in diagnostics ex-COVID 16% organic that came in above the long or the low double-digit full year guide. What drove such strong growth there, particularly in molecular? And then, can you just remind us, is the combo COVID and flu test included in that non-COVID number? And would that have driven kind of outsized growth given the strong respiratory season?

Very little on the second part of that, the driver of growth -- and Karleen can jump in as well here -- is that the key drivers of growth are really our new products, things like BV/CVs, some of our new assays in the core women's health business, and finally, having a chance for many of these customers that bought Panthers or replaced Panthers during COVID time, actually now starting to have a chance to breathe and transfer our existing assays over onto those machines as the COVID revenue comes down. And as you know, we kept saying, during a lot of this time, people were looking for -- wait a minute, you keep saying your core diagnostics business is going to do well with these Panthers. But the customers had to keep delaying bringing on our other assays because we kept seeing the spikes in COVID. And now as COVID starts to become more normalized, it's giving our customers the chance to adopt our assays.

Yes, I would just add 2 points to that -- to the comment of adopting more assays. We've put out in our presentation that we've looked at the new customers acquired during the pandemic. Over 85% are running at least one other assay compared to COVID and over 55% are running 2 other assays versus COVID. And the other contribution to the quarter was from the acquisitions, specifically Biotheranostics, which is off to a great start.

Maybe just on the COVID side, $127 million of assay revenue, this compares to $150 million for the year guide. Do you have a new number that you could point us to for fiscal '23? And then maybe is this year sort of representative of what the new endemic run rate would be for COVID or is there still sort of a lingering benefit there?

Yes. So we'll -- Casey, we'll update the full year outlook on the earnings call as we update our guidance for the full year. But certainly, it seems like we're getting into this endemic state with this virus. And we don't really know what it will be, but just to put it in perspective, if this was $200 million of revenue annually, it would be our second largest assay. So even if it continues to drop and steadies off at that level, it's really a nice contribution to the business.

Maybe on breast. You mentioned that the results there were ahead of your internal estimates for the quarter. Can you just talk about the recovery process there and the early traction you're seeing so far?

Yes, sure. So as we guided to the full year, we've gotten more confidence that we've got all the materials that we need to deliver that outlook. So that gave us a little more confidence. We've got a little more incremental chips to deliver, a little more than we had planned in the first quarter. I think what you'll see is continued improvement sequential Q2, Q3, Q4. And while we're still on allocation, we're having good discussions with our suppliers and hopeful that we'll exit the year at a more normalized demand and supply equaling.

Maybe just moving down into surgical here, strong organic growth, 15%. How much of this growth was due to Fluent versus the core business in MyoSure and NovaSure?

Really across the board.

Yes, it was across the board. It was the legacy NovaSure actually had a nice quarter with. We've done some innovation there. We had a line extension and NovaSure which created a little more excitement for that, continued nice performance from MyoSure and Fluent continues to be a silent performer here, contributing nicely to the -- with the reoccurring element. And then finally, the acquisitions contributed as well.

Yes, the fun part about this business [ has been to watch ]. MyoSure has become so much bigger than we ever would have imagined. And I think we continue to probably underestimate the full size of that market, and particularly if you think about it globally, it's continued to grow. But that was the primary driver of growth really for a number of years. And now we've added Fluent, Bolder and Acessa. So we've got these multiple growth drivers now, and then NovaSure being the new product actually helping to grow that. But it's just -- it's a completely different dynamic in that business now than we've ever had.

Maybe just digging into diagnostics on the non-COVID molecular side, on Panther, ex-COVID, is it safe to say vaginitis has been the key driver of growth there across the menu, or are there other legacy tests that are seeing substantial growth ahead of your expectations?

Yes. BV/CV was certainly the highest contributor to growth. When we look down the portfolio of assays, as Steve talked about, the respiratory assays contributed nicely as we expand that portfolio. Virology continues to contribute as we expand the market in Africa specifically, and then the acquisitions, as I mentioned, Biotheranostics, not on Panther, but even contributing to that growth in molecular.

And Casey, by the way, this is where something like BV/CV, it might not be obviously the outside world. It's what comes out of being a very strong leader and having the relationships with all the key opinion leaders in the space because we're so strong in the molecular space and in women's health and Pap testing and everything else. We realized how many women were seeing their doctors really for BV/CV, and it was not a clear test for it. So we develop it, and we continue to be in dialogue with what else needs to be developed out there. And we don't talk about them while they're in development until they hit the market and we build those markets. But I think this is just a great market building opportunity, but it was many, many years in the works.

What are your expectations for Panther placements for fiscal '23? And how would that skew OUS versus U.S.? And then just on the international placement side, how confident are you that you can sell through the rest of the menu to these customers versus in the U.S.?

Yes, so I would suspect that placements will come down. That's our expectations in '23 and likely in '24 compared to the normal 225 prior to the pandemic, and that's directly attributed to the acceleration of placements over the last 3 years. I think what's happened over that acceleration of placements is it's become more global in nature. We're not quite 50-50, but probably 55 U.S., 45 OUS. And we have high confidence in our ability to continue to sell through both U.S. and OUS. And I think the metrics that are in our corporate presentation, that we talked about the new customers and their uptake in non-COVID assays, really is the proof point on that.

Obviously, Panther is a leader in women's health testing, but I'm curious about how virology is tracking. Are these tests being added by legacy women's health customers or is it a separate customer group?

Yes, as I talked about, a lot of that virology has to do with our global access initiative that Steve talked about, about bringing these tests to these emerging countries to improve the health of the population there. But certainly, that's a big driver. And then I think it's a share taker for us. It's more of a me-too assay in the U.S. and OUS.

Okay. I'll pause here, if anybody has any questions. Looks like we have one.

Hi, I'm Susan Trent from Atlantic Therapeutics. Notwithstanding, obviously, the huge opportunity that you have in terms of globalization of what's already in your portfolio, what do you see as the next emerging trends in the underserved areas of women's health?